Monday, January 12, 2009

May 2008: Food Shortage?

Shortly after sending out my March e-letter on the Recession, I was driving home listening to All Things Considered, the National Public Radio Evening News. There was a story on the price of rice. It seems that two years ago rice was selling for $250 a ton. In 2007, the price had risen to $350 a ton. Today the price is $850 a ton. I was shocked. I also knew I would be writing about this topic in May. I am a bit amazed to be writing on such a similar topic a short two months after writing about the recession in my March letter. It is something, however, that I do worry about.

A short internet foray led to the following facts on the price of rice. US long grain rice has doubled to $800 per ton since last year. A year ago, Indian basmati rice was selling for $850 a ton and has risen 182% to $2,400 in April. Thai jasmine rice was $559 last year. The price for this rice increased to $1,125 per ton. The increase has been dramatic this year. In January, the price for basmati and jasmine rice respectively were $625 and $1,300 per ton.

This kind of steep increase in price has forced and is partially fueled by rice producing countries hording their production. Certainly, it forces the price of rice up for the more affluent parts of the population. We complain but in the end we pay. The news may force us to horde rice as well. Costco and Sam’s Club and other stores have limited the purchase of rice to one 25 lb bag per person. This, of course, caused a run on rice. Some of the outlets of these chains can barely keep rice in stock.

The problem is in the poorer countries, the countries that need and rely on the import of this staple grain the most. Their supplies have been severely curtailed to the point of causing riots. In early April, there were reports of riots and unrest in Haiti, Egypt, Bangladesh, Burkina Faso, Cameroon, Indonesia, Ivory Coast, Mauritania, Mozambique, Bolivia, and Uzbekistan. These are countries were the average person spends 50-60% of their income on food and where the price increase of rice alone can erode the countries’ GDP by one percentage point.

Some of the articles I read even talk about prices increasing another 40% this year. Whether that happens or not, one thing is very clear. The poorest people of the world are feeling this problem in their wallets and, of much greater concern, going hungry.
Is this an aberration? Is it just a matter of price-supply equilibrium being reset? Or is it something more? Is this the first sign that the population has finally grown to the point where we have outstripped the resources of the planet and hence our ability to feed and sustain ourselves?

As I try to make sense of this, there are two schools of thought that seem to cover the basic analyses and arguments:
1. Free Market Economy School
2. Limits to Growth School
Free Market Economy School: This school believes that markets and free market economies are efficient and will, over time, correct themselves. The forces of supply and demand will reach equilibrium in terms of pricing and consumption. Furthermore, as business and science march forward with more and more innovation, people will be offered more and more the products and services that will make their lives better.

There is thought in this school that we are in the midst of a “commodity bubble.” This is a condition where speculation and futures trading runs up the costs of commodities such as oil, grains, and metals. To some it resembles the technology (dot com) stock market bubble of the late nineties. The bubble will eventually burst, not without pain to some, and prices will correct themselves. George Soros is definitely in this school of thought though he believes that the bubble is still growing.

We may well be in a commodity bubble. But, it cannot be likened to the bubble. The companies and their stock were entities created for the most part from our imaginations. They were not a finite natural resource like oil. There was not a physical production limit like there are for agriculture and food processing. I am not sure if there were one thousand companies or one hundred thousand. It really didn’t matter the companies were concepts.

Limits to Growth School: I have labeled this school after the famous 1972 book of the same title: Limits to Growth. I read it as an impressionable sophomore and the message has stayed with me. Basically, the premise is that our population is growing exponentially and hence our demand on the planets resources which are finite. Exponential growth of consumption will at an ever increasing rate consume the resources quicker than we can possibly react. Without better planning and management of population and resources, the results could be devastating.

Populations grow exponentially and certainly tax the world’s natural resources at the same rate. But, with the advance of science and technology, we consume the resources at an even faster rate. Many of the advances that make life “better” are dependent on technology that is driven by petroleum or electricity. The burning of petroleum fuels for transportation and coal used to generate electricity are changing our climate and have an adverse effect on agriculture.

Both of these schools believe that they are right. The Free Market Economy School views the Limits to Growth School as doom and gloom tree huggers (or so I think). The Limits to Growth folks look at the Free Marketeers as short sighted and profit motivated. Neither side views the other in a very positive light.

Like most other topics, I do not adhere to either school exclusively. The truth is rarely in black or white. The truth often lies in the grey in a mix of both sides. Both views have valid points and solutions. The right path is probably a mix of the two points of view.

Population: First, we cannot talk about global resources without talking about the real and exponential growth of population which is currently 6.6 Billion people. Consider the following:

It took all of human history to reach a population of 1 Billion

103 years more to reach 2 Billion in 1930

30 more years to reach 3 Billion in 1960

14 years to reach 4 Billion in 1974

13 more years - 5 Billion in 1987

11 years to get to 6 Billion in 1998 &
11 more to get to 7 Billion in 2009

2021 8 Billion
2035 9 Billion
2059 10 Billion
This dramatic growth in population has mirrored the industrial revolution. The two are definitely co-dependent. Without the Industrial Revolution and subsequent advances in mechanization for farming and distribution and chemicals for fertilization we would not be able to feed the number of people inhabiting the planet today.

With this dramatic growth of population, we have also tapped into the worlds resources at an ever increasing rate. There is serious talk of the great Saudi Arabian oil field, the Ghawar Field, of going dry in the next 2 -20 years. We use incredible amounts of resources. The average person cannot really comprehend the massive consumption of goods and the increase in the demand for goods and resources as the population continues to grow. Here are some distressing facts and projections from
At least part of the rise in global consumption is the result of population growth. The U.N. projects that world population will increase 41 percent by 2050, to 8.9 billion people, with nearly all of this growth in developing countries.

This surge in human numbers threatens to offset any savings in resource use from improved efficiency, as well as any gains in reducing per-capita consumption. Even if the average American eats 20 percent less meat in 2050 than in 2000, total U.S. meat consumption will be 5 million tons greater in 2050 due to population growth.

Every day in 2003, some 11,000 more cars merged onto Chinese roads—4 million new private cars during the year. Auto sales increased by 60 % in 2002 and by more than 80 % in the first half of 2003. If growth continues apace, 150 million cars could jam China’s streets by 2015—18 million more than were driven on U.S. streets and highways in 1999.

As many as 2.8 billion people on the planet struggle to survive on less than $2 a day, and more than one billion people lack reasonable access to safe drinking water.

The U.N. reports that 825 million people are still undernourished; the average person in the industrial world took in 10 percent more calories daily in 1961 than the average person in the developing world consumes today.

Calculations show that the planet has available 1.9 hectares of biologically productive land per person to supply resources and absorb wastes—yet the average person on Earth already uses 2.3 hectares worth. These “ecological footprints” range from the 9.7 hectares claimed by the average American to the 0.47 hectares used by the average Mozambican.
Note that the population projection in the bullet point has the 2050 population at 8.9 billion. The table shown earlier has us somewhere around 9.5 billion. Which is correct? These are both forecasts and thus only time will confirm what will truly happen. The same can be said for oil reserves. These are directional trends which may or may not come true depending on a multitude of factors such as war, disease, and scientific advances.

Why is there a food shortage at this time?: I was in Knoxville, TN in April. I was at the University of Tennessee a Supply Chain Forum where Sanford Brands is one of the sponsoring companies. As part of the forum, we heard the latest research in the field of logistics and supply chain management. The cocktail hours were also a chance for us to meet and perhaps eventually hire MBA students. During a cocktail reception the first night, I had the opportunity to meet and chat with several impressive MBA students.

I ended the evening talking with two of students from India. We were talking about this current food crisis. As it turned out, they had done research on this subject. They had just returned from Argentina where they had witnessed acre upon acre of farmland that had recently been converted from wheat to corn. The wheat had been grown for food. The corn was now being grown for ethanol.

There is a lunacy to this. The articles I have read all state that producing a gallon of ethanol consumes at least as much energy as the gallon will deliver. There is no energy gain. It is a feel good scam that takes away from the world’s food supply.

Furthermore, the taste for beef is also an inefficient use of grain, often corn. It takes 700 calories of feed to product 100 calories of beef. The more beef consumed by more and more of the population, the further the strain on arable farmland. With the economic emergence of China, their increasing affluence has increased their demand for beef and hence an even accelerated demand on grains.

The Tennessee MBA students told me that we should not be having a food shortage. We still have the capability of feeding ourselves. They believe that pricing, supply and demand are in flux right now and will reach equilibrium. I believe they are right. I will believe in a real and true world food shortage when my front and backyard are turned into a mini-farm, a modern equivalent of a Victory Garden. I also hope we never have to get to that.

In this sense, I am agreeing with the Free Marketeers. We are in a commodity bubble right now. There are elements of greed, speculation, and the lunacy of feeling good by using renewable ethanol. Sadly, the shortages are only affecting the poorest people on the planet. Sure, Costco’s and Sam’s Club limited rice purchases in April to 25lbs of rice per visit. How did we ever manage?

OK. Maybe this current shortage is a commodity bubble. Maybe supply, demand, and price are simply being reset. Yet, the following is quite clear to me.

First, agriculture is now global. Actions in one part of the world can and do affect food supplies in other parts of the world. We have food riots in the poorest countries because of some combination of the Chinese eating more beef and more and more land being used to grow corn for ethanol. This is a recent phenomenon. Historically, food supply and demand tended to be much more localized. You would not have had a food riot in Egypt because of how farmland was being used in Argentina.

Secondly, the fragility of the system may well have been exposed with this commodity bubble. This may well have been a warning, the caged canary coughing a few times in the coal mine. We may well grow past our ability to feed everyone. The downside of this would be the addition of population to the equilibrium equation of supply, demand, and pricing. Simply said, people would die. They might die en masse.

Thirdly, while the market economy would react and adapt eventually, it may not be fast enough to avoid a disastrous period. Businesses think in terms of quarters. A strategic plan is, at best, only two to five years. Most businesses, no matter what they say, believe that resources are infinite. Their strategic plans are in line with their current product lines. Sure, prices may fluctuate with supply and demand but neither oil nor automotive companies are truly contemplating, beyond feel good advertising we are being bombarded with, the end of fossil fuels. If and when we reach the limits of our ability to feed ourselves, we will not be able to react fast enough to avoid some pretty tough times. Is this 5, 10, 50, or 100 years from now? This is the big question.

We may have time to solve this thing. It is entirely unclear if we have the organization and resolve to do this. It requires a level of planning and cooperation on a global scale that may only be dream.

I do like to dream…

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